One of the key focus areas of the Union Budget 2016-17 was ease of doing business in India which was part of the transformative and developmental agenda of the Government. The idea was to introduce initiatives for ensuring ease of doing business in India not just for companies/other entities but also for ordinary people in their dealings with the Government. In line with the stated policy of the Government, the guiding principle in terms of ease of doing business has been to minimize governmental involvement and maximizing governance.
In this direction, it was proposed to amend the Companies Act, 2013 (Companies Act) to remove the difficulties and impediments to ease of doing business and also to improve the enabling environment for start-ups. The other key initiatives proposed by the Finance Minister (FM) in his Budget speech, with a particular focus on foreign direct investment (FDI) initiatives were:
- Allowing up to 49 per cent FDI in the insurance and pension sectors through the automatic route;
- Permitting up to 100 per cent FDI in Asset Reconstruction Companies (ARCs) through the automatic route;
- Increasing the investment limit of foreign entities in Indian stock exchanges (Exchanges) from 5 per cent to 15 per cent, on par with domestic institutions to enhance global competitiveness of Exchanges and accelerate adoption of best-in-class technology and global market practices;
- Increasing the existing limit of 24 per cent for investment by foreign portfolio investo(FPIs) into central public sector enterprises, other than banks, in stock exchanges to 49 per cent, in order to obviate the need for prior Government approval for foreign portfolio investment;
- Expanding the basket of FDI instruments to include hybrid instruments;
- Allowing FDI in areas beyond the eighteen specified non-banking financial company activities falling under the automatic route;
- Granting residency status to foreign investors, beyond the current practice of giving them a five-year business visa; and
- Introducing a Centre State Investment Agreement to ensure fulfilment of the obligations of the State Governments under these Treaties. The States which opt to sign these agreements would be seen as more attractive destinations by foreign investors.
On fiscal measures, various initiatives were announced which included reduction of rate of interest in case of delayed payment of indirect taxes from 18 per cent to 15 per cent and in case of service tax to 12 per cent if the taxable value was less than Rs. 60 lakhs. The number of returns required to be filed were reduced from 27 to 13. Certain cesses where revenue collection from each of them is less than Rs. 50 crores in a year were to be abolished. Exemptions from customs duty for goods imported for exploration of oil and gas hitherto under various lists and entries were to be merged into a single exemption with a unified list of specified goods with conditions. Amendments to the Cenvat Credit Rules, 2004 were proposed to improve credit flow and to reduce compliance cost and litigation.
Post Budget 2016-17 – Implementation and challenges
Based on the official figures appearing on the website of the Department of Industrial Policy and Promotion, Government of India, FDI inflows have increased significantly over the last year. Total FDI in the country in the last financial year was US$55.6 billion, up by 23 per cent over the previous year.
True to his promise, the FM introduced the Companies (Amendment) Bill, 2016 in the Lok Sabha on March 16, 2016 to address and rectify many operational anomalies as well as procedural bottlenecks under the Companies Act including providing ease in holding general meetings, filing annual returns, flexibility in inter-corporate investments and loans and guarantees, ease in the procedure of private placement of securities, clarity in corporate social responsibility obligations, etc. However, the bill has not yet been passed by the Rajya Sabha.
The Government has also introduced SPICe Form (INC-32) through the Companies (Incorporation) Fourth Amendment Rules, 2016 to enable incorporating a company with a single application for reservation of name, incorporation of a new company, application for allotment of Director Identification Number, and/or applying for PAN and TAN of the new company, thereby further simplifying the process.
The passage of the Insolvency and Bankruptcy Code (Code) is another key reform that went underway this year. The passage of the Code is a major step towards assuring ease of doing business and will help assure greater legal certainty and speed in closure of businesses that need winding up due to genuine reasons. The Arbitration and Conciliation Act, 1996 was also amended with the view to ease enforcement of contracts.
Though the policy initiatives appear to be in the right direction, however, the actual implementation of these initiatives, especially the effectiveness of the Code and the amendment to the arbitration laws could be gauged in the years to come.
On the fiscal side, though the FM in his last Budget 2015-16 had promised to bring down the corporate tax rates from 30 per cent down to 25 per cent in a phased manner, no steps were taken in this direction. India, therefore, remains one of the high tax destinations for investors. Add to this, the dividend deduction tax at 15 per cent (effective 20 per cent) and the Minimum Alternative Tax (MAT) at 18.5 per cent clearly act as a deterrent to ease of doing business in India.
No wonder, despite the various initiatives, India was ranked at a low 130th position in the list of 190 nations on the ease of doing business index released by the World Bank in 2017. There was an insignificant jump of only one position as compared to the previous year’s ranking.
Expectations from the Budget of 2017
The 2016-17 Union Budget did get its intentions right to transform India and was lauded as a step in the right direction so far as ease of doing business is concerned. However, it is merely the means to an end and much is expected of the Budget of 2017 to carry these initiatives forward. As is frequently the case with FDI reforms in India, there has to be a match between the proposed liberalization and the steps taken to ensure its implementation. It is expected that the Budget of 2017 will address the following areas:
- Simplifying rules for approval and greater stability in the foreign investment regulations;
- Providing a roadmap for FDI in retail trading;
- Providing more clarity for FDI in B2C e-commerce with provision of enabling marketplaces to give a discount from their side. Even the Government has observed the misuse of FDI guidelines last year by e-commerce companies and more stringent reforms are expected. This will help strengthen small e-commerce players to be back in the game and make the battleground a fair one;
- Providing a stable, favourable and investment friendly climate for global funds seeking to participate in India’s e-commerce industry;
- Doing away with/amending those regulations that are no longer relevant or create multiplicity of required compliances;
- Creating an inter-ministerial forum, where industry, banks and other stakeholders can seek quick resolution on issues involving more than one ministry; and
- Having a single window mechanism for micro, small and medium enterprises (MSMEs), who face time and capability constraints in adhering to complex procedures and compliances, to serve as a one-stop shop for all business related compliances, with in-built provisions for time bound clearances.
On the fiscal side, it is high time that the corporates rates are cut significantly so as to render India an attractive destination for investment. With amendments to DTAAs with Mauritius, Cyprus and Singapore, the Government has effectively plugged the tax leakage on account of misuse of these treaties. Also, the implementation of ‘place of effective management’ and GAAR would ensure that round tripping is under check and curtailed over a period of time. Hence, the time has come to drastically rationalize the corporate tax and do away with multiple exemptions and deductions, which is a cause of numerous litigation.
Abolishing MAT, especially on foreign companies opting for presumptive tax, has been a long standing demand of the industry and is clearly an impediment in the ease of doing business in India.
Additional benches of the Authority of Advance Ruling (AAR) need to be operationalized at the earliest to clear the significant backlog of cases. The Government should also notify a time frame within which advance rulings have to be disposed of by the AAR in order to make the forum more effective.
On the indirect tax side, the industry would look forward to implementation of GST this year.
On an overall analysis, the key to achieving the object of ease of doing business would be a combination of effective implementation of policy measures along with rationalizing the fiscal and commercial laws.